BAML's CIB chief says US dominance is here to stay

As the dust kicked up by restructuring and regulation in the aftermath of the banking crisis begins to settle, two things have become clear. The first is that market participants appear to be operating in a world where liquidity is reduced and volatility amplified, creating a potentially dangerous feedback loop between the two. The second is that, as far as capital markets and investment banking are concerned, US banks have established a very definite edge over their European rivals.

The bare statistics make this latter point as plain as day. According to data provider Dealogic, from January 2015 to October 2015, overall US investment banking revenue totalled $29.3bn, more than twice that made by their European counterparts. Over the same period, all the top five revenue-earning investment banks were from the US, which had a market share of more than 30%. 

Advantage America

For Christian Meissner, head of corporate and investment banking at Bank of America Merrill Lynch (BAML), this dynamic looks locked in for now. “I expect that the advantage currently held by the larger US banks will hold for quite some time. Unlike banks in a lot of other regions, we all still have global businesses and global aspirations. Collectively, we have gained market share while many of our European competitors have been squeezed,” he says. BAML came third in the revenue stakes last year, securing a market share of more than 6%.

Some have attributed this growing disparity to the slower pace of European rule-making. The US got much of the hard graft of reform out of the way relatively early, allowing Wall Street more time to adapt and operate within a more stable regulatory environment. There is no denying that EU legislators and regulators, mired in a far trickier decision-making process than their US counterparts, have been sluggish in working through the required changes.

This is particularly evident in the area of market structure. In the US, most of the work of central clearing and the establishment of new types of trading platform has been completed. In Europe, mandates for central clearing have yet to be fully established, and the second Markets in Financial Instruments Directive, a major piece of legislation that will set new market structure standards, will not be in force until 2018 at the earliest.

Mr Meissner, however, does not find these factors particularly convincing. “Regulations never stand still, so you have to assume that regulatory change is constant, wherever and whenever you operate,” he says.

Global ambition

At some point, Europe will implement the planned reforms,  but even then US banks will still have a huge advantage due to the sheer size of the domestic capital markets. Operating from this solid base of clients, the big US banks can generate enough revenue to operate on a global scale. Few European banks, on the other hand, can still foster this ambition. The EU is making strides to level the playing field through its plans for a capital markets union, but the fruits of this will take a long time to be fully tasted. At the moment, it is very hard for a European bank to offer a comprehensive, pan-European capital markets service.

For Mr Meissner, this is a more fundamental issue. “The seminal question is, what is your business model? In the post-crisis era, the US banks were the first to answer that question successfully, and have reaped the rewards from that,” he says.

At BAML, that process involved a number of important changes. The corporate and investment banking (CIB) businesses were integrated back in 2011, precipitating a dramatic reduction in the number of CIB clients. This has allowed BAML to focus on gaining a disproportionately large market share among fewer, higher value names. Organisational stability has also allowed for the pursuit of an unglamourous but important quality in banking: consistency. “What can be most damaging among clients is inconsistency – dipping in and out of markets or providing erratic pricing. Every bank has to make huge efforts to get the right people in the right positions making the right decisions at the right time,” says Mr Meissner.

Volatile times

Last year was punctuated with poor tidings in the markets – further eurozone instability, a tumbling oil price and faltering growth in China. The early months of 2016 have provided little respite, with the severity of these issues and others increasing week by week. Capital markets have been exceptionally turbulent, but Mr Meissner is looking on the bright side. “Not to sound too sanguine, but debt and equity capital markets are still open, companies are still engaging in a wide range of activities, and the key drivers of sentiment are still sound. There is still a fair amount of good news – China is growing slower but a hard landing has been avoided. The low oil price has good implications for consumers and oil-importing countries as well as negative implications for oil-producing countries. It’s not all negative,” he says.

In the meantime, volatility in the capital markets looks set to continue. There is an argument that much of the ‘froth’ in these markets has been produced not by economic data or genuine market sentiment, but by a systemic lack of liquidity. With banks less able to hold risk and make markets thanks to greater balance sheet pressures, markets now come with a much weaker safety-valve, meaning that even relatively low-key news events can produce big moves.

Logically, lower capacity for market making should produce higher volatility. Balance sheet changes, and regulation such as the Volker Rule, have led to a number of firms leaving some investment banking markets altogether, or significantly scaling back their operations in this area. However, empirical data to support this theory is scarce. “More work has to be done to determine if there is a market structure problem here,” says Mr Meissner. “The equity capital and high-yield bond markets are the most obvious areas of volatility at the moment, and those markets had become quite expensive so some pullback was inevitable. The big question is what happens from here.”

As yet, economic growth among the major economies has been relatively immune from this market turbulence. “In some ways it’s a bit of a waiting game at the moment. We’re looking to the US and China for more economic data that will give an indication of the road ahead. Some research suggests that the US is in an industrial recession and that it is the consumer and services sectors that are really powering growth and keeping things healthy. That may well be true, and data will provide more clarity,” says Mr Meissner.

“In other areas, it’s clearer what is happening - oil is likely to stay low until demand picks up, which probably isn’t going to happen in the near term unless producers get together and reduce supply. There’s no real impetus to do that – Iran is coming on stream, US fracking is more resilient than expected, and Saudi Arabia and Russia need to keep the pumps going to support their economies."

Few complaints

Despite the uncertainty in the market, Mr Meissner’s capital markets teams cannot complain about a lack of activity. "We’ve actually been pretty busy, despite the backdrop," he says. "There are still windows in which clients can get transactions done."

Clearly, some areas are slower than others, but there are still lively sectors. In energy and commodities, many firms are attempting to use benign periods on the markets to restructure their balance sheets, term-out debt or build a greater capital cushion. In early January, BAML acted as joint-bookrunner on a $1.4bn common stock offering from Pioneer Natural Resources, a Texas-based oil firm.

There are also a lot of assets in the hands of financial buyers – sponsors and sovereign wealth funds being the standouts – with an expectation that these institutions will be net sellers for the foreseeable future. There is also some hope from the technology sector. "A lot of great companies in this space have been raising cash in the private markets, so it’ll be interesting to see whether the public markets support those valuations. There’s certainly a backlog of transactions there. Last year was our busiest in mergers and acquisitions for quite some time, so there will also be lots of financing and de-risking that needs to happen,” says Mr Meissner.